|dc.description.abstract||The interest in corporate social performance (CSP) and socially responsible investing (SRI) has
increased remarkably over the past years as a result of numerous global developments and
heightened pressures from internal and external stakeholders. The mixed views and ambiguous
empirical evidence on the implications that CSP has on corporations’ financial risk has left
corporate managers and investors with an unclear answer as to how much effort should be put
into socially responsible activities. This paper purposefully attempts to fill this research gap by
examining the relationship between CSP and financial risk for a sample of 150 publicly listed
firms in the Nordics, excluding Iceland, between the years 2002 and 2017. We find it to be
particularly interesting to investigate this region given the leading role that the Nordic countries
play when it comes to sustainable investing. Environmental, social and governance (ESG)
scores provided by Thomson Reuters ASSET4 database are used as proxies for CSP, whereas
firm risk is measured by total, systematic and firm-specific risk.
By employing a panel autoregressive (VAR) model, we find a negative and bi-directional
causality between aggregate ESG and total and specific risk. At a disaggregate level, we reveal
that each ESG dimension also impacts total and specific risk negatively. The reciprocal effect
of firm risk on CSP, in turn, depends on the ESG dimension in question: total and specific risk
negatively affect environmental performance, positively and negatively impact social
performance (alternatingly), and positively impact corporate governance. As for systematic
risk, no significant interaction with the CSP measures is found.
Comprehensively, our findings provide evidence of an intricate relationship between CSP and
firm risk and they support the idea that there is a business case for corporate social responsibility
and performance in the Nordic market.